Loans > Auto

What's the best way to finance the purchase of a new car?
LISI de BOURBON, AP Business Writer. Associated Press
Copyright Associated Pres

Q: I'm planning to buy a new car. Am I better off borrowing money for the deal from a credit union, bank or the manufacturer?

A: Your objective is find the source offering the best interest rate.

"The first mistake people make is thinking there's an easy way to find the cheapest rate, because there's not if you really care about your money," said Remar Sutton, author of "Don't Get Taken Every Time: The Ultimate Guide to Buying or Leasing a Car in the Showroom or on the Internet."

Sutton, also the president of the not-for-profit Consumer Task Force for Automotive Issues, said that in many instances, the difference between the highest and lowest interest rate on a car loan can run into the thousands of dollars.

Consumers should get bids from at least two banks or credit unions, as well as one from the manufacturer, said Robert Gentile, manager of Consumer Reports' New Car Price Service. Shoppers might also consider visiting several dealers, even if they sell the same brands, he added.

Aside from convenience, financing a car through a dealer is attractive to borrowers with spotty or no credit histories, said Skip Harkness, operations manager for the National Automobile Dealers Association in McLean, Va.

Dealers already have established relationships with lenders, and stand a better chance of securing a loan than if such a consumer applied at a bank, he said. Another reason to consider the dealer is that special incentives, such as ultra-low interest rates, are frequently offered.

If you decide to finance your car through the manufacturer, it's important to get your own credit report, to compare to the one the dealer obtains.

"Don't let a dealership tell you about your credit," said Sutton. "It's in their interest to tell you you don't have the best credit because the interest rate you pay is based on your credit report."

Credit unions can be appealing because they typically offer lower car-loan rates than banks, said Mark Wolff, spokesman for the Credit Union National Association, a Madison, Wis.-based trade group.

As not-for-profit cooperatives, credit unions have operating costs that tend to be much lower than commercial banks, Wolff said. Those lower costs are often passed along to depositors in the form of higher interest payments on savings and to borrowers as cheaper loan rates.

"Consumer loans and auto loans are their bread and butter, so they strive to offer attractive rates," he said.

In fact, a chart on the group's Web site compiled by research firm Datatrac recently showed that the average interest rate on a 48- month new car loan from credit unions was 7.62 percent. Banks were offering an average of 8.31 percent.

But the bottom line remains the same: shop around.

"If speed and convenience mean anything to you, hand them your wallet," said Sutton. "If you care about saving money, do your homework."


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